8x8 2010 Annual Report Download - page 32

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Income and Other Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process requires us to estimate our actual current tax expense and to assess
temporary differences resulting from book-tax accounting differences for items such as deferred revenue. These differences
result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. In the event that we determine that we would be able to realize deferred
tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in
the period such determination was made.
Significant management judgment is required to determine the valuation allowance recorded against our net deferred tax assets,
which consist of net operating loss and tax credit carry forwards. We have recorded a valuation allowance of approximately
$68.7 million as of March 31, 2010, due to uncertainties related to our ability to utilize most of our deferred tax assets before
they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the
period over which our deferred tax assets will be recoverable.
We have received inquiries, demands or audit requests from several states and municipal taxing and 9-1-1 agencies seeking
payment of taxes that are applied to or collected from the customers of providers of traditional public switched telephone
network services. We have recorded an expense of $0, $72,000 and $375,000 for the years ended March 31, 2010, 2009 and
2008, respectively, as our estimate of the increase in probable tax exposure for such assessments. Our cumulative estimate for
probable assessments is $0.1 million as of March 31, 2010, which is recorded in the accrued taxes line item in the consolidated
balance sheets.
Stock-Based Compensation
We account for our employee stock options and stock purchase rights granted under the 1996 Stock Plan, 1996 Director Option
Plan, 1999 Nonstatutory Stock Option Plan and the 2006 Stock Plan and stock purchase rights under the 1996 Employee Stock
Purchase Plan (“Purchase Plan”) under the provisions of ASC 718 – Stock Compensation (formerly Statement of Financial
Accounting Standards No. 123(R), “Share-Based Payment”). Under the provisions of ASC 718, share-based compensation cost
is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the
employee’s requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures. We have
adopted the modified prospective transition method as provided by ASC 718 and, accordingly, financial statement amounts for
the prior periods have not been restated to reflect the fair value method of expensing share-based compensation.
Stock-based compensation expense recognized in the Consolidated Statements of Operations for fiscal 2010 and 2009 included
both the unvested portion of stock-based awards granted prior to April 1, 2006 and stock-based awards granted subsequent to
April 1, 2006. Stock options granted in periods prior to fiscal 2007 were measured based on ASC 718 (formerly SFAS
No. 123) criteria, whereas stock options granted subsequent to April 1, 2006 were measured based on ASC 718 (formerly
SFAS No. 123(R)) criteria. In conjunction with the adoption of SFAS No. 123(R), we changed our method of attributing the
value of stock-based compensation to expense from the accelerated multiple-option approach to the straight-line single option
method. Compensation expense for all share-based payment awards granted subsequent to April 1, 2006 has been recognized
using the straight-line single-option method. Stock-based compensation expense included in fiscal 2010 included the impact of
estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
To value option grants and stock purchase rights under the Purchase Plan for actual and pro forma stock-based compensation
we used the Black-Scholes option valuation model. Fair value determined using the Black-Scholes option valuation model
varies based on assumptions used for the expected stock prices volatility, expected life, risk free interest rates and future
dividend payments. For fiscal years 2010, 2009 and 2008, we used the historical volatility of our stock over a period equal to
the expected life of the options to their fair value. The expected life assumptions represent the weighted-average period stock-
based awards are expecting to remain outstanding. These expected life assumptions were established through the review of
historical exercise behavior of stock-based award grants with similar vesting periods. The risk free interest was based on the
closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term equal
to the expected term of the option. The dividend yield assumption was based on our history and expectation of future dividend
payout.